GE head of mining finance Richard Byrne said whether the finance was being sought by a small contractor or a global contractor, there were several areas that needed to be addressed before a financier would willingly lend large amounts of money.“The first thing that all financiers will evaluate is the contractor’s ability to make all repayments over the proposed term of the financing,” he said.“Detailed cashflow forecasts for the proposed financing terms are a must to allow both the contractor and the financier to fully understand the revenues, costs, pressure points and debt coverage ratios.”Byrne said another classic cause for concern for financiers was a contractor’s reliance on only one or two sources of revenue, as the loss of just one contract would be likely to result in some significant financial hardship.A financier will also want to fully understand the contractor’s business and that of the miner it is working alongside. If a small contractor is working with a small miner, any downturn can severely affect both companies due to the flow-on effects and a party’s ability to meet payment obligations.In the situations where a small contractor is working with a big miner, Byrne said a financier would be interested in the fine print of the mining contract and examining the risks to the contractor if the contract was terminated.“The ability for mining companies to walk away at short notice with little cost is always an issue,” he said.“This is a major red flag for financiers considering providing finance to mining contractors who have a large portion of their income tied up in these style contracts. Contractors are often the first to be cut when times get tough.”In the broad context of the world commodity markets, Byrne said both the contractor and financier needed to understand the underlying market dynamics that could affect a mining company over the period of the contract and consider how any changes to the market could directly affect the contractor by increased or decreased rates of work or, in the worst case, the termination of a contract.On the equipment side of things, financiers would raise concerns with contractors looking to fund a piece of equipment that was hard to mobilise or had a limited second-hand market.“Contractors may need to look at a put-and-call option or some form of compensation agreement from the mining company to offset the risk of using niche equipment that is difficult to resell.”Byrne said it was vital contractors discussed with financiers their plans for the equipment at the end of the contract so that the right funding structure was selected.If the mining company was keen to take control of the equipment in the case of the contract being terminated or not renewed, funding structures needed to be flexible to allow the company to step in, such as tripartite agreements, step-in rights or purchase options.This article first appeared in the April 2010 edition of Contractor magazine.
